Discussion:Contract with home builder gone awry
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Discussion Forum Index --> Tax Questions --> Contract with home builder gone awry
| 9 October 2009 | |
| I'm trying to think of any tax deductions in the following situration but I am coming up dry.
An individual contracted with a home builder to build a house for the individual. He and the contractor are now at an impasse. The individual feels there are significant problems with the house the contractor built for him. The contractor says take it or leave it. The indiviudal has paid the contractor $150k. If the taxpayer took out a loan to have the house constructed, he should be entitled to an interest deduction but I'm thinking of any write-off related to the $150k. Any thoughts will be greatly appreciated. | |
| 9 October 2009 | |
| Let me see if I understand this. Your client paid this guy the money, and AFTER he's paid the money, he discovers that the house is not up to snuff? Is that it?
Well, why didn't he do like the banks do and only pay the money after each phase had been completed and inspected? Sounds like your client needs to be lining up a lawyer to see if he's got a case. Though, I am not sure if there is a legal claim for stupidity. But, maybe I'm not understanding the question. | |
| 9 October 2009 | |
| I think you understand it correctly. Other than getting moeny from a lawsuit I don't think he can try an get anything from the IRS :( | |
| 9 October 2009 | |
| He'll claim he held the property for investment (although he intended to live in it) and the he should get a write-off on Sch D. He's have to not only prove he held it for invesment purposes but that he abandoned the property (can't take a write-off if you're still holding the property). | |
| 9 October 2009 | |
| On the legal side, I think he would have to prove that the builder hid the fact that he was doing substandard work, or work that was not to specifications. In other words, your client will likely have to prove that he was not able to discover the substandard work during construction because the builder committed some kind of fraud (concealment or the like). A local lawyer needs to look at the case to properly advise your client. | |
| 9 October 2009 | |
| He is working with a lawyer now and their both looking to me to tell them he is entitled to a tax deduction. | |
| 9 October 2009 | |
| I don't see any deductions in this including any interest unless the original facts are concealed and you try to represent this is something investment related. Maybe the lawyer should do that return. | |
| 10 October 2009 | |
| That's what I'm thinking. Sound like if he's desperate enough he will try and misrepresent the facts to me and there is no way I want to be associated with the client or do the tax return. | |
| 10 October 2009 | |
| What's the present value of the house & how much to bring it up to
"acceptable"? | |
| 10 October 2009 | |
| I had a similar situation with a client which Conrad has described. In my client's case, she paid close to $250K before realizing that the general contractor had taken her -- client had relied upon others to manage the job unfortunately and the general contractor cashed her checks without paying the subs as well as not delivering product that she had order and paid him for. The contractor left the country for a while and now is in Kentucky apparently. She met with a lawyer and together they are finding other poor souls out there who the contractor swindled. The question I asked myself is whether or not this could be taken as a theft loss. To that end, I found a court case "Norton v Commissioner" 13 AFTR 2d 1775, which was right on point. The Tax Court looked to the definition of theft per state law, California in this case. The representations made by the contractor to the taxpayer, in order to qualify as a threft, must have been "knowingly and designedly" made.
The Tax Court stated that with respect to the contractor's work being performed according to the contract, even thought the workmanship was lousy, it was not shown to have been "knowingly and designedly" made. As a result, no theft loss for the poor workmanship and defective construction. However, to the extent that the subcontractors and materalmen had not been paid, the Tax Court agreed that this was a theft loss. The Court held that the contractors representation that these people had been paid was a false statement which was "knowingly and designedly" made. So I think you may have some theft loss available to you if you can identify the costs related to the non-payment, if any, to the subs, or payment to satisfy any mechanics liens, if any, placed on the property as well as any payments made for materials not furnished to the job. | |
